Inside a brokerage acquisition

South Florida’s residential brokerage giants have been on a spending spree.

While the market was grinding to a halt, firms like One Sotheby’s International Realty and Keyes Company were focusing on growing their businesses in other ways, with the former picking up smaller fish like Crescendo Real Estate and Turnberry International Realty and the latter scoring Bluffs Real Estate and a major player in Palm Beach, Illustrated Properties.

The bigger firms doing the acquiring hope to gain quality agents and client lists, while the smaller ones getting swallowed up are often looking for fast cash. Depending on number of employees, sales volume and other factors, sellers of the smaller firms can make $500,000 in an acquisition, some brokers said.

But surprisingly, in a business dominated by million-dollar listings, money isn’t always the most important factor when it comes to building business through acquisitions.

“Generally, we can get a financial valuation and model put together in less than a week,” said Steve Murray, president of Real Trends, a consultancy and communications company based in Colorado that has worked on a number of South Florida’s mergers and acquisitions, including at least three One Sotheby’s deals and the Brown Harris Stevens-Zilbert deal.

“In most cases, [that’s] not a huge problem. It is finding the right fit of people and culture that determines if a deal goes through,” he said.

Trying to land an acquisition deal is a bit like dating: You look for a partner who not only has similar practical traits to your own but also believes in all the same things you do. 

And assessing a cultural match is not an easy process. Buyers will walk away from an acquisition if something is off, insiders say. One potential deal breaker? “When I meet an agent that says to me, ‘I really don’t like rentals,’ and they’re not open-minded to opportunities,” Jay Parker, CEO of Douglas Elliman Florida, told The Real Deal.

Another turnoff? If they use lockboxes instead of showing up to a listing in person. “If [an agent] is putting a lockbox up so they don’t have to go there, you’re not for us,” he said.

Parker knows almost immediately whether he’s interested in pursuing an acquisition deal, especially if a seller spends most of the time talking about how the deal could benefit themselves and not their agents and Elliman, or if a firm is a “low-cost provider” that offers brokers high commissions and little support.

Elliman recently met with an company in Palm Beach County but found “they didn’t really understand the value of our brand and our platform,” Parker said, declining to name the firm.

“I knew the agents weren’t looking to capitalize on what a professional organization can offer. That’s not the type of culture we’re interested in blending into,” he said.

One Sotheby’s, which since 2015 has been more active than most when it comes to mergers and acquisitions, also stresses the importance of a cultural fit.

“Our main strategy is to acquire firms that share our culture and have been in business for a long time in South Florida,” One Sotheby’s President Daniel de la Vega told TRD. “We’re a big family. To be here, you have to want to be and understand the way we go about our daily lives and our business.”

One Sotheby’s now has 15 offices and more than 750 agents in South Florida. Its five acquisitions over the past two years have added 282 agents, according to a spokesperson. It acquired Diane Lieberman’s South Beach International Realty in 2015, Crescendo Real Estate in 2016 and One Miami Group Brokers, Turnberry International Realty and Coastal Sotheby’s International Realty this summer.

But there are cases in which cultural differences can be overcome. The 2015 deal between Brown Harris Stevens and Miami Beach-based Zilbert International Realty was not a perfect meshing of firms, Zilbert’s founder, Mark Zilbert, said.

“By a lot of measures, BHS is a New York-based brokerage that has a culture that’s somewhat different than in Florida,” he said, but went on to explain that he believes there are synergies between both firms that drive “the flavor of the brand.”

“Miami operates a little differently, but we felt like they were the same people,” he said, adding that BHS brought its “white-glove service” to Miami.

Zilbert had reached out to Murray to sell his firm in 2014. Zilbert spoke with other companies, which Murray declined to name, and negotiated with BHS for about eight months before the deal closed in 2015. To make the deal happen, all of BHS’s four owners, William Lie Zeckendorf, Arthur Zeckendorf, David Burris and Kent Swig, had to agree on the terms. It marked new territory for the firm, which has since acquired Ocean Club Realty in Key Biscayne and Avatar Real Estate Services in Coconut Grove and South Miami.

“One or two of them really, really thought this was the right deal; the others took time to do their homework,” Murray said.

Zilbert, who was on a cruise in France when interviewed for this story, likes to take time away, which was a factor.

He also “couldn’t easily jump into a company that was already established in Miami.”

The deal initially created Brown Harris Stevens | Zilbert;  the Zilbert name was dropped about six months after the acquisition closed. Zilbert.com, a top website for Miami listings, with up to 70,000 unique visitors per month, will likely be kept online “indefinitely,” Zilbert said. Clients will now be directed to the nearly identical BHSMiami.com.

Douglas Elliman employees and others celebrated the opening of their Delray offi ce after the fi rm acquired Tauriello & Co. Real Estate last year. From left to right: Delray Chamber of Commerce President Karen Granger, Delray Commissioner Mitch Katz and Douglas Elliman’s Gus Rubio, Sue Tauriello, Dan Tauriello, Ingrid Carlos and Jay Parker.

The former Zilbert office has since grown to about 40 agents and Brown Harris Stevens now has six Miami offices from its subsequent acquisitions of Avatar Real Estate Services and Ocean Club Realty, including two in Miami Beach, one in Coconut Grove, one in South Miami and two in Key Biscayne.

While some cultural differences are workable, they get harder to surmount when they extend to differing philosophies in financial structure.

“We’ve never paid agents to come here. We don’t provide our agents with a bankroll; we provide our agents with a suite of services, but it is expensive,” Parker said.

One Sotheby’s, too, has a structure that it’s looking to see in the firms it acquires. The brokerage has a set compensation plan for the agents and a marketing strategy. Those are nonnegotiables, and firms looking to become a part of One Sotheby’s must agree to adhere to its terms fully before a deal can be struck.

“Unless that brokerage firm is somewhat close in those areas to the way One Sotheby’s is, you can be asking for trouble,” said Murray.

Firms like One Sotheby’s and BHS are “not interested in buying a firm where they charge [brokers] $100 a month and $400 per transaction” rather than offer a commission split, Murray said.

But they are looking for high sales volume from the firms that they’re looking to acquire.

Over the past two years, most deals in South Florida have ranged from about $1.4 million to $12 million for companies ranging in size from 65 to more than 500 agents, a source told TRD. The more you produce, the higher the payout for sellers. The owners of these firms typically receive a payment upfront, with the rest being contingent on agents staying and sales volume, among other factors that vary deal to deal.

Acquisitions and mergers can take months or years to actually close. Most valuations are based on between three and five multiples of EBITDA, or earnings before interest, tax, depreciation and amortization. Keyes Company will pay between two and six times a firm’s EBITDA, its CEO, Mike Pappas, told TRD.

A firm brokering $100 million in sales will have a gross income that is about 2.5-2.6 percent of that.  Five percent of that 2.5 to 2.6 percent is its profit or net income, said Murray.

According to his calculation, a firm brokering $100 million in sales is netting $125,000. The acquisition price would typically be about four times that, which comes out to about $500,000.

A firm has to be averaging at least $3 million in annual sales production per agent to be considered for acquisition by Douglas Elliman, Parker told TRD.

Zilbert’s Miami Beach firm had about 25 agents averaging $9 million a year in sales in 2015 before it was acquired by BHS.

The Keyes Company, which has also been on an acquisition spree, looks for firms with $100 million to $200 million in annual sales with agents selling at least $2 million on average. “What’s the real cash flow? Am I keeping the offices? Am I folding them in?” Pappas wondered aloud, adding that he’s done between 50 and 60 acquisitions over the past 15 years and now has 2,800 agents and 47 offices in the tri-county region.

Once Elliman decides to move forward with a deal, it’s a “full-on dog and pony show,” Parker said. Depending on the size of the company, the New York-based brokerage may host a lunch, dinner or cocktail reception at a local restaurant to introduce Elliman to the agents. While the brokerage’s Chairman Howard Lorber and CEO Dottie Herman haven’t flown into South Florida for an acquisition, Elliman Florida COO Gus Rubio, the marketing team and regional managers will attend welcoming events, along with Parker. Otherwise, “they have no idea who they now work with,” Parker added.

Elliman rolled out the red carpet for Tauriello & Co. Real Estate, which the firm acquired last year after a year and a half of exploring the Delray market. Founder and owner Sue Tauriello stayed on as an agent.

Most of the acquiring firms, like Elliman and One Sotheby’s, said they preferred the owner to stay on an as agent. “Tauriello & Co. provided us with a location we wanted. If we had an office there, that would have made it very challenging,” Parker said.

The acquisition sprees are a matter of survival for big firms, experts said. Adding more brokers while consolidating overhead costs is key to making the deals successful.

Keyes Company’s big acquisitions began back in 2002. Faced with competition from bigger firms like Coldwell Banker, Keyes decided it would grow in size to compete, investing millions of dollars in technology, human resources and attorneys, Pappas said. “We have to do the volume to handle the infrastructure. The cost per office and corporate overhead is a lot,” he said, adding that agents are commanding a higher commission split than before.

“I believe that the commission payouts will continue to rise, and the commission fees will continue to drop. Who the blazes would want to be in this business?” Pappas said.

After Keyes merged with the No. 1 firm in Palm Beach, Illustrated Properties, in July 2016, the homegrown company bought the Florida offices of Shorewood Real Estate and Bluffs Real Estate and Investment Properties a year later. Earlier this year, under the Illustrated brand, Keyes also purchased JT Brokers in Jupiter.

Illustrated Properties was quietly being marketed for sale following the death of its president, Chappy Adams, in 2013. Illustrated Chairman Francis Fiske “Bud” Adams Jr. was pursued by dozens of firms.

Firms looking to be purchased cannot be too public about it. As de la Vega told TRD, companies that are on the market are “not the kind of firms I want to buy.”

Keyes didn’t begin negotiating with Illustrated until the spring of 2016. The year before, “we got a note that he was not going to do the deal with us, he was going to go outside of the business and didn’t want to go with a brokerage firm,” Pappas said. But Illustrated’s leadership changed their minds and worked out a merger between March and July.

Pappas said it was the right deal at the right time, as was the case with Shorewood. Shorewood’s President and CEO Roger Herman was looking to exit the Florida market. Most of the Shorewood agents are now working out of Keyes’ Aventura office.

These costly acquisitions are possible due to other sources of cash for the firms, like mortgages, title insurance and property management services. Keyes, like EWM Realty International, Coldwell Banker and others, beefs up its business with those supplemental services.

“Without the ancillary businesses, I don’t think the current model we’re offering is survivable if I’m looking into the future,” Pappas said.

Pappas is always hunting for the next deal. “We pursue them in a nice sort of way,” he said. “We’ve got time on our side.”